Stock - Sri Lanka inflation
Stock markets are shut next week in Colombo for public holidays. Image Credit: Bloomberg

Colombo: Sri Lanka’s central bank raised borrowing costs by 700 basis points amid economic turmoil.

The Central Bank of Sri Lanka increased the standing lending facility rate to 14.5 per cent from 7.5 per cent, it said in a statement Friday. That’s way above the median estimate of 8.5 per cent in a Bloomberg survey of economists.

“I am here to implement independent policy making. There is no political interference in my regime, I have made it very clear to the authorities,” newly appointed Governor Nandalal Weerasinghe said at a subsequent briefing. “I have full support and blessing from the government, opposition parties, and most important the general public.”

Weerasinghe’s emphasis on credible policy comes days ahead of expected talks with the International Monetary Fund to steer Sri Lanka through its foreign exchange and debt struggles, including $8.6 billion worth of payments due this year. On Wednesday, the South Asian nation announced a three-member advisory group that will help in managing the debt crisis and engage with outside lenders.

“It is a sharp increase and we were expecting it to be split in two policy meetings. However, it is the right call in the current circumstances,” said Lakshini Fernando, an economist at Asia Securities ltd. in Colombo. “The bold move takes us one step closer to the IMF negotiations as it shows the country’s resolve to act.”

The decision by the central bank - which takes cumulative hikes to 900 basis points from the pandemic-era low - is aimed at curbing demand pressures in the economy amid falling foreign exchange reserves. The move will also lend support to its currency which has dropped more than 57 per cent since being devalued.

Inflationary pressures could intensify in the period ahead and “a substantial policy response is imperative,’ the central bank said in a statement. Consumer prices accelerated to about 19 per cent last month, Asia’s highest rate.

The central bank on Friday also raised the standing deposit facility rate to 13.5 per cent from 6.5 per cent.

Stock markets are shut next week in Colombo for public holidays. They had already been trading for shortened sessions due to electricity outages of as long as 13 hours a day as fuel runs out.

“The situation could worsen further within next couple of weeks or months, still turnaround will happen at some point,” Weerasinghe said.